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Future of American manufacturing hangs in balance

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By James McCusker
This is the first of two columns on American manufacturing, its jobs and the economic policy decisions that will affect its future.
Assuming that all 315 million of us do not perish in a plunge over the fiscal cliff, we have some important, and interesting, economic policy decisions to make. One of them involves "Made in U.S.A." and its future.
A friend of mine, a former co-worker, once told me of his parents' painful decision to sell the family business. Their foundry had been in operation for three generations but by the late 1960s, the business was having financial troubles.
Among other problems, they couldn't seem to recruit and keep a solid labor force. Foundry work is hot and dirty, and workers soon left for other opportunities. My friend's parents recognized the problem and believed that higher wages might compensate for some of the working conditions, but they couldn't afford the added cost because of financial pressure from Asian and European competition.
The story of their foundry parallels the story of American manufacturing. Once the pride of our "can-do" nation, and the hope and envy of nations around the globe, "Made in U.S.A." seemed destined for history's dusty corner.
In 1947, after shifting from wartime production to producer and consumer goods, U.S. manufacturing represented just over a quarter of our Gross Domestic Product on a value-added basis. In the mid-1950s, it hit its peak economic significance, and was responsible for 27.8 percent of our entire economic activity.
The falloff from that peak wasn't rapid at first, but it gathered momentum. By the mid-1960s, as our commitment to the Vietnam War was expanding, manufacturing's contribution to GDP had dropped back to where it had been at the end of World War II. By the middle of the 1970s it had fallen to 20.6 percent.
In the first decade of the 21st century, it seemed as if there was nothing but air underneath the manufacturing sector and it was plummeting downward at a dizzying speed. By last year, manufacturing had lost a jaw-dropping 5.4 million jobs and represented only 11.5 percent of our GDP. And while the recession didn't help, it cannot be blamed for manufacturing's free-fall.
There were visible changes that had shown up a lot earlier, of course. By the late 1960s, for example, the manufacturing sector found it increasingly difficult to recruit college graduates for manufacturing positions. Most of them saw more attractive economic opportunities in the service sector, where the people on TV worked and you didn't have to get your hands dirty. Manufacturing was increasingly seen as something that we didn't do well in America -- our automobiles were often emblematic of this view -- and from a career standpoint it looked more like the past than the future.
In some ways, they were right. U.S. manufacturers were finding it very difficult to compete with their overseas rivals. At first, it was just a matter of labor costs. Over time, though, the low-cost manufacturers acquired the technically skilled labor forces and production equipment that made them competitive in almost all markets.
Our overseas competitors were aided not only by the spread of free trade agreements, a story in its own right, but also by the changing economics of global trade itself. Improvements in port freight-handling facilities, more efficient freighters, and relatively low energy costs all contributed their muscle to pull down the barriers to foreign competition. Everybody wanted access to the fattened U.S. markets and our manufacturing sector looked more and more like a deer in the headlights.
A number of American manufacturers have found ways to compete and go head-to-head with any competitor -- at least any competitor who is playing by the rules. The anchor points for successful competition by our manufacturers have been:
•Responsiveness to customer requirements, and foreseeing requirements that might help those customers themselves gain a competitive edge.
Quality and quality control.
Flexibility, and shorter, lower volume, runs. Some mass market opportunities still exist, of course, but not for most manufacturing enterprises.
The cadre of surviving manufacturers could lead a revival of manufacturing in our country if some key economic factors affecting costs continue to improve. Natural gas prices are still declining, which will have a positive effect on many manufacturing operations. Labor costs for some major foreign competitors, especially China, have been rising markedly. And retailers have been controlling inventories much more tightly, which puts pressure for flexibility in production runs, giving domestic suppliers an advantage.
These economic improvements for U.S. manufacturers may be offset by the costs of "Obamacare," of course, but the specifics of that are still not known.
The economic policy question is whether the federal government should encourage domestic manufacturing or let "Made in U.S.A." fend for itself. There are some good reasons on both sides of that argument.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.



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